A prevalent worry among retirees is that they may outlive their retirement funds. As a result, many people are scared to squander their retirement savings. And it’s not surprising, given how poorly prepared many Americans are for retirement. You’ll regularly hear professionals in the financial services industry say exactly that. That many retirees are scared to spend is unsurprising.
Although older Americans tend to underspend, research shows that those who spend more actually have higher levels of retirement satisfaction. However, with so many years of expenses to pay, many people are frugal and hesitant to spend their hard-earned money. Especially considering inflation and the possibility of living to be 95 or even 100 years old. Can your savings really last you that long?
How Many Retirees Are Scared to Spend?
Researchers refer to it as the “retirement consumption puzzle.” Married 65-year-olds with at least $100,000 in financial assets made an average annual withdrawal of 2.1% of their savings. This is the finding of a study* that analyzed data from a long-term survey of over 20,000 persons over the age of 50. This is significantly lower than the 4% spending rate that many advisers recommend.*
“The goal is to ensure nest eggs last 30 years in the worst of times, which means they last even longer in better markets.”*
Surprisingly, wealthier retirees are more inclined to spend less than they could afford to. Over the course of a 30-year retirement, persons in the top 20% of the wealth distribution might have the opportunity to spend an additional $773,000 to $1.165 million., depending on their investing approach. However, people are missing out because they’re scared to spend. Planning for longevity and other factors is crucial, but so is enjoying your retirement. For many, retirement is when they will have the time, money, and wisdom to properly enjoy their lives to the fullest.
Overcoming the Fear
Making the transition to the withdrawal stage after years of retirement account contributions may be challenging. Many are hesitant to spend because of the uncertainty surrounding how long we will live and how well the markets will perform. One typical strategy* is to rely mostly on investment income, pensions, and Social Security to support yourself, waiting until the age of 73 to withdraw from their retirement plan accounts. Age 73 is the time when the government requires those with traditional retirement accounts to take required minimum distributions (RMDs) and pay associated taxes.
Spending is often seen as reckless, while saving money is seen as a virtue. Many people may struggle to justify spending money on an expensive gift or a first-class flight someplace nice, for example, since it contradicts their image of themselves as being more frugal. Many who are scared to spend have a higher level of self-control. As a result, they may come to realize that they have more saved for retirement than they thought. It’s difficult to change your habits once you’re officially retired. But, in order to assess our money honestly, we must be able to separate ourselves from our habits and emotions. Speaking with a financial professional may be advantageous in this situation.
Consider Phasing Into Retirement
There is a compelling case for retiring gradually in order to protect one’s financial, physical, and emotional health. There are several financial benefits. You stay physically engaged for an extended period of time. Mentally, altering who you are becomes a journey rather than a sudden transition. You may be able to postpone collecting Social Security retirement payments for a short period of time, resulting in an automatic inflation-adjusted raise to what is likely to be one of your only fixed income streams.
Create a Portfolio Designed For Retirement
Your retirement portfolio can be put to many different personal uses. Your current asset allocation may not be suited to your needs, objectives, and risk tolerance, and, thus, may not be helping you towards your retirement goals. Many retirees’ plans encourage them to stick to a single withdrawal amount: a statistically-tested percentage of their portfolio to withdraw per-year during retirement.
Four percent is the amount that is typically advised. In other words, you will probably “leave this earth with just as much or more than you entered retirement with” if you take out only 4% of your retirement portfolio each year.* Some people refer to this as “The 96% Problem.”*
“The stark reality of the 96% problem isn’t just about unused wealth, it’s about unlived lives. It’s about the moments we didn’t seize, the hands we didn’t hold, the places we didn’t go, and the changes we didn’t make.”*
You may be able to meet more of your goals at this stage of life by approaching retirement money with a more goal-based approach. This can be achieved by working toward the objectives listed below:
Create an “emergency” fund to ensure you are prepared for anything.
To protect yourself from the stock market’s short-term volatility, construct a “retirement paycheck” for yourself with more stable assets.
To finance your future and counteract inflation, try to increase your wealth throughout retirement.
Make thoughtful contributions to the causes and people that matter most to you.
Conclusion
Based on our experience leading individuals and families into and through retirement, we’ve discovered that the first few years of retirement can be among the most difficult times in a person’s life. They do not have to be, however. Retirement is not something to be feared; instead, it can and should be a period of purpose and fulfillment in your life. Contact us to learn more.
*Source: Forbes, the Wall Street Journal
